Czech bank governor could have last laugh over euro opposition

Governor of the Czech National Bank Miroslav Singer has signalled he will
not give up his opposition to the European single currency in spite of the
positive adoption signals being made by members of the incoming government.

Miroslav Singer, photo: Filip Jandourek
In a blog published Wednesday, Singer set his sights on dismantling what he
regards as the myth that Slovakia has performed better than the Czech
Republic thanks to the euro. Slovakia joined the club of mostly much richer
countries in 2009.

Since then, Slovaks wealth, in terms of comparative purchasing power, has
risen slightly to 75% of the EU average in 2012 while Czechs’ performance
has slumped over the period from 83% to 79%. It’s still a bit better than
the neighbours, but not much.

Singer says, accurately, that the Slovaks were catching up from a much
lower economic base and took more courageous steps to cut the tax burden
which boosted economic growth.

One of the main arguments in Slovakia for beating its big brother, the
Czech Republic, as well as Poland and Hungary, to the euro was that it
would make the country more attractive for foreign investments.

The results, according to Singer’s figures, are far from being in favour
of the euro. After a surge of investment ahead of the event, incoming
foreign investment slumped in Slovakia in 2009. In only one of the
following four years did foreign direct investment per person in Slovakia
exceed that in the Czech Republic with the Czech level often twice as high.

Singer, who stays on in the top banking job until 2016, can throw out all
the facts and statistics he likes at the little loved euro. He is already
deeply branded as a eurosceptic, like his model and mentor in most things
monetary, Václav Klaus, and his words and warnings will likely be cold
shouldered by the government.

For all that, Singer could complicate the Czech path to the euro in his
remaining months in office. His weak crown policy is deliberately aimed at
encouraging a degree of domestic inflation. Although this should not exceed
the bank’s 2.0 percent target, one percentage point on either side of the
target though is regarded as permissible.

Even, 2.0% inflation though might be too much for the Czech Republic to
join the euro under the existing conditions and current convergence
criteria. This calls for the aspirant country not to have an inflation rate
which more than 1.5 percentage points above the average of the best EU
performers. The current best performers are ironically Greece, with an
annual 2013 inflation rate of minus 0.9, Latvia at 0.0%, and Bulgaria and
Cyprus at 0.4%. Greece’s deflation is so severe that it is ruled out of
the count but the others remain in the frame.

To put it simply, the rules call for the Czechs, currently putting a heavy
foot down on the economic fuel pedal and stoking price rises in the
process, to fall into line with countries still in reverse gear with
austerity measures still shrinking demand.

It’s unlikely, but not totally inconceivable, similar figures will apply
four or five years down the line when Czech might really be facing up to
meeting the euro membership rules. Even if Singer is long gone as governor,
a centre left government whose growth promotion policies are helped by a
weak crown and higher inflation might still be around.

If Czechs failed the inflation hurdle in such circumstances then Singer
surely would have the last laugh and his criticism of the euro zone as a
non-optimal monetary area would be difficult to dispute.